Hardwoods announces record fourth quarter and full-year 2016 results

March 22, 2017

By Hardwoods Distribution Inc.

March 22, 2017 - Hardwoods Distribution Inc. has announced financial results for the three months and full year ended December 31, 2016. Hardwoods is North America's largest wholesale distributor of non-structural architectural grade building products to the residential and commercial construction markets, with a strong US and Canadian distribution network.

The Board of Directors approved a quarterly dividend of $0.0625 per share, payable on April 28, 2017 to shareholders of record as at April 17, 2017.

"We achieved record top and bottom line results in 2016 as we benefited from the addition of Rugby Architectural Building Products and generated organic growth in mixed market conditions," said Rob Brown, President and CEO.

"The Rugby acquisition was the highlight of the year and has already proved accretive to our results with adjusted diluted profit per share growing 10.8% to $1.33 in 2016, from $1.20 in 2015. Rugby is a large and successful US wholesale distributor of architectural grade building products to customers that manufacture end-product to the commercial market. With the addition of Rugby's 28 distribution facilities, Hardwoods has emerged as the number one North American distributor in our sector with a total of 58 distribution facilities, more than 35,000 customers and a pro forma annual sales of approximately $1 billion. During the five-and-a-half months we operated this business in 2016, Rugby contributed revenues of $175.1 million."

Organic growth accounted for $20.4 million of Hardwoods' year-over-year sales growth. Foreign exchange was also a factor in the Company's performance, but affected the fourth quarter and full-year periods differently. Results for the three months ended December 31, 2016 were negatively impacted by a decrease in the value of the US dollar compared to the Canadian dollar, while full-year results were positively impacted by a strengthening in the average value of the US dollar during that period. A stronger US dollar benefits the Company by: i) increasing the value of sales and profits earned in the US operations when translated into Canadian dollars for financial reporting purposes; ii) increasing the selling price of US dollar-denominated products sold to Hardwoods' Canadian customers; and iii) improving the export competitiveness of the Company's Canadian industrial customers, many of whom have the capability to sell their manufactured products in the US.

"Our global product sourcing and commercial market strategies continue to play an important role in our business. We have the size, scale, and strong balance sheet position to pursue growth by acquisition, and the highly fragmented nature of the US architectural building products distribution industry provides numerous opportunities. We will continue to pursue opportunities that take us into new US markets, expand our presence in existing markets, and that can be added on an accretive basis for shareholders."

On March 13, 2017 the Company acquired Eagle Plywood and Lumber ("Eagle") for a purchase price of US$0.4 million plus up to an additional US$0.2 million subject to future sales performance. "The Eagle acquisition is an example of our ability to expand our presence in an existing market," said Mr. Brown. "We've now completed five successful acquisitions in the past five and a half years and have a demonstrated ability to achieve profitable growth in this way," Mr. Brown concluded.

Outlook

The recent change in US government administration is expected to usher in new approaches to trade and economic growth in the US. While it is still too early to identify what specific policies will be implemented or how they will impact the US economy, proposals for a large infrastructure spending program, a reduction in the corporate tax rate, and a more protectionist approach to trade, including the potential for a border adjustment tax (BAT), have been discussed.

With 85% of its operations now domiciled in the US, Hardwoods is positioned to benefit from policies that stimulate the US economy or prove generally positive for business. Conversely, the Company could be negatively impacted, at least in the near term, by trade decisions that affect its import program. As discussed in Hardwoods' press release of November 21, 2016, a trade case has been initiated in the US with respect to imported hardwood plywood from China. Although Hardwoods sells more domestically sourced hardwood plywood than imported, approximately 11% of the Company's total sales could be affected by this case. In the event that trade duties are levied against hardwood plywood, this would impact the market for hardwood plywood in the US with the potential for significant changes in selling prices, margins, and/or product supply availability. Should the US government move to impose a BAT, similar effects could be seen on a wider range of import products and not just those from China. We are watching both the current trade case and broader US trade policy decisions closely, and have worked to secure a range of alternative supply solutions. Furthermore, we have increased our inventory balances and positioned ourselves to respond in the event significant changes occur.

Notwithstanding the uncertainty around US trade and economic policy, Hardwoods' outlook for 2017 is positive. Gross profit margin as a percentage of sales is expected to remain above the levels Hardwoods has traditionally achieved, reflecting Rugby's higher-margin product mix. Operating expenses are also expected to be moderately higher due to Rugby's sales model. While EBITDA on a dollar basis is expected to benefit from increased sales, EBITDA as a percentage of revenue is expected to be moderately lower due to the increased operating expenses.

On the market front, the unevenness and relatively slow growth experienced in the US residential construction market in 2016 is expected to continue into 2017. As a result Hardwoods expects organic growth to remain modest in the near term. Market fundamentals remain sound however, with US job growth and income levels gaining momentum. Harvard's Joint Center for Housing Studies report on the "state of the nation's housing" concluded that housing construction should average at least 1.6 million units a year over the next decade in order to replace older units and meet demand. With average housing starts at 1.2 million in 2016, there is considerable room for growth in this market, although it could take time to reach the 1.6 million level.

In the non-residential construction market, the American Institute of Architects predicts moderate growth of 6.7% in 2017, with the strongest gains anticipated for the commercial sectors that Hardwoods focuses on.

Strategically, the Company will continue to implement its strategies, including leveraging its excellent global product sourcing capabilities, capitalizing on opportunities in the commercial market and pursuing strategic acquisitions.

The Board will continue to review Hardwoods' financial performance and assess dividend levels on a regular basis. However, the primary focus will be to retain the cash necessary to finance the significant market growth opportunity in the US and to keep the balance sheet strong, reduce debt and support future strategic acquisitions.

Results from Operations - Year Ended December 31, 2016

For the year ended December 31, 2016, total sales increased by 38.1% to $789.3 million, from $571.6 million in 2015. Of the $217.7 million year-over-year increase, $175.1 million, representing a 30.6% increase in sales, was driven by the addition of the Rugby operations, $20.4 million, representing a 3.6% increase in sales, was due to organic growth and $22.2 million, representing a 3.9% increase in sales, was due to the positive impact of a stronger US dollar when translating US sales to Canadian dollars for reporting purposes.

Hardwoods' sales growth came primarily from its US operations, where sales activity increased by US$142.5 million, or 40.1%, toUS$498.2 million. Rugby, which was acquired on July 15, 2016, contributed sales of US$132.6 million. Organic growth accounted forUS$9.9 million of the US sales uplift as Hardwoods increased sales volumes in response to higher demand and yielded sales gains from its strategy of leveraging import products and strengthening sales into commercial construction accounts. Sales in Canadaincreased by $13.1 million, or 11.2% in 2016, reflecting Hardwoods' success in winning new business, as well as the positive impacts of a stronger US dollar.

Gross profit for the 2016 year increased 44.3% to $143.8 million, from $99.6 million in 2015. This gain reflects the increased sales, together with a higher gross profit margin. As a percentage of sales, gross profit margin increased to 18.2%, from 17.4% in 2015.

Full-year operating expenses increased to $104.9 million, from $67.4 million in 2015. The increase includes $29.3 million of Rugby operating expenses, $2.4 million of transaction expenses related to the Rugby acquisition, a $3.0 million increase in expenses due to the impact of a stronger US dollar on translation of US operating expense, and $2.7 million of added costs to support organic growth. As a percentage of sales, annual operating expenses were 13.3%, compared to 11.8% in 2015.

Adjusted EBITDA for 2016 increased to $46.1 million, from $34.8 million in 2015. The 32.6% gain primarily reflects the $44.1 millionincrease in gross profit, partially offset by the $32.8 million increase in operating expenses (before expenses related to the Rugby acquisition and before an increase in depreciation and amortization). Adjusted profit for the period increased 26.0% to $25.4 million, from $20.1 million in 2015. The year-over-year increase reflects the higher Adjusted EBITDA partially offset by a $1.4 million increase in income tax expense, a $1.6 million increase in net finance costs, and a $2.2 million increase in depreciation and amortization. Depreciation and amortization in 2016 includes $0.9 million intangible assets amortization relating to customer relations acquired in connection with the acquisition of Rugby.

A more detailed discussion of the Company's financial performance can be found in Hardwoods' 2016 Management's Discussion and Analysis (MD&A). The MD&A will be posted, along with the Company's audited financial statements, on SEDAR (www.sedar.com) and on the Company's website (www.hardwoods-inc.com) on or before March 17, 2017.

Results from Operations - Three Months Ended December 31, 2016

For the three months ended December 31, 2016, total sales increased by 69.8% to $239.4 million, from $141.0 million in Q4 2015. Of the $98.4 million year-over-year increase, $93.5 million, representing a 66.3% increase in sales, was due to Rugby's operations and$5.8 million, representing a 4.1% increase in sales, was due to organic growth. The sales gain was partially offset by a $0.9 millionnegative foreign exchange impact resulting from a stronger Canadian dollar, representing a 0.6% decrease in sales.

Hardwoods' US operations, which accounted for approximately 85% of fourth quarter revenues, increased sales by US$71.3 million, or 84.5%, to US$155.7 million. The Rugby operations contributed US$70.1 million of this increase, with the remaining increase related to organic growth.

Sales in Canada, which comprised approximately 15% of fourth quarter revenues, grew by $3.6 million, or 12.9%, to $31.7 million. The improvement in Canadian sales reflects Hardwoods' success in winning new business.

Fourth quarter gross profit increased to $43.5 million, an increase of 74.2% from $25.0 million in Q4 2015. The year-over-year improvement reflects higher sales revenue combined with a higher gross profit margin from both the Rugby and Hardwoods operations. As a percentage of sales, fourth quarter gross profit margin increased to 18.2%, from 17.7% in Q4 2015.

Operating expenses for the three months ended December 31, 2016 were $34.8 million, compared to $18.0 million in Q4 2014. This increase primarily reflects Rugby operating expenses of $16.3 million, $0.1 million of transaction-related expenses, and $0.5 million of added costs to support organic growth. These increases were partially offset by a $0.1 million decrease in expenses due to the impact of a stronger Canadian dollar on translation of US operating expenses. As a percentage of sales, operating expenses increased to 14.5% from 12.8% year-over-year, primarily reflecting Rugby's higher ratio of operating expenses as a percentage of sales.

Fourth quarter Adjusted EBITDA increased 42.6% to $10.9 million, from $7.7 million in Q4 2015. The $3.3 million gain reflects the increase in gross profit, partially offset by higher operating expenses (before expenses related to the Rugby acquisition and before an increase in depreciation and amortization). Profit for the period increased 47.4% to $6.6 million, from $4.5 million during the same period in 2015. The year-over-year increase reflects the higher Adjusted EBITDA and a $1.1 million decrease in income tax expense, partially offset by a $0.8 million increase in net finance costs and a $1.4 million increase in depreciation and amortization. Depreciation and amortization includes $0.9 million intangible assets amortization relating to customer relations acquired in connection with the acquisition of Rugby.